Insider Trading: Employing Mob-like Tactics to Realize Tremendous Profits

An article from earlier this year on fortune.com said that “more than half of the best-known white-collar inmates… are in prison because of insider trading.” What causes people to risk being one of the next infamous white-collar inmates by committing insider trading? For most people it’s because of the unbelievably high profits. But just how profitable can insider trading be, and how do people get away with it?

Insider Trading: Massive Investigation in the Works

Various news outlets are reporting that federal authorities are working on what sounds like a massive case to prosecute about 120 individuals in an insider trading crackdown on Wall Street. 

The FBI has also released a video with Michael Douglas commenting on the problems of insider trading. It appears this is a focus of prosecution for federal authorities for the time being....

Madoff Investors vs Rajaratnam Investors

A NYTimes op-ed raises an interesting question: When we sue Madoff investors who were "net winners" to recover their ill-gotten gains, why don't Rajaratnam's Galleon investors face consequences of a similar nature--why are they allowed to keep their ill-gotten gains?  From the op-ed:

Political Perks: Evidence of Insider Trading in Washington

When it comes to insider trading cases, probably none have been as big as the recent conviction of the billionaire Raj Rajaratnam, former hedge fund manager and founder of Galleon Group. (See our prior posts on Rajaratnam here.)

Rajaratnam had a huge web of contacts that fed him with insider information which he then traded on to make billions and to obtain abnormal returns for investors in his hedge funds. His case has been hailed as a huge victory for the US Justice Department in an effort to crack down on what is believed by some to be a widespread problem in our capital markets.

There is now evidence suggesting that the Justice Department may not need to look so far from Capital Hill to find rampant insider trading. A new study...

Raj Rajaratnam Conviction

Posting to Blogger was down for over 24 hours, so this is a bit delayed.  Two days ago, Galleon Group founder Raj Rajaratnam was convicted of 14 counts of securities fraud and conspiracy.  One of the things that stands out to me about this case is the breadth of Rajaratnam’s insider trading network.  The WSJ has an interactive graphic that maps out Rajaratnam’s network, and seeing the number of people involved in the network blows me away. 

 

Remember, this isn't a diagram of Rajaratnam's golfing buddies--these are people who have at least been accused of passing on insider information.  More than anything, seeing such a network makes it hard for me to believe that this is an isolated incident.  Indeed, current trends suggest that we are just starting to see how pervasive insider trading really is.  According to the WSJ:

Barry Minkow Will Plead Guilty to Insider Trading

Barry Minkow, the mastermind behind the ZZZZ Best fraud, will plead guilty to one count of insider trading, according to the WSJ.  Minkow spent seven years behind bars for his crimes related to the ZZZZ Best fraud, and since serving his time has worked as a minister for a California church and as a fraud buster.  Minkow has received accolades from the FBI for his role in exposing a number of frauds.  To fund his fraud busting operation, Minkow would short the stock of the companies he investigated just prior to publicly releasing his reports on the questionable activity of those companies.  In one of those cases, it appears that Minkow traded on privileged information.

$67.5 Million Settlement for Former Countrywide CEO

The economic crises resulted in many fraud allegations--now we are seeing some of the fallout of those allegations.  Angelo Mozilo has agreed to a $67.5 million settlement with the SEC over allegations of civil fraud and insider trading charges.  Mozilo did not admit to any wrongdoing in the settlement.  Via NYT:

Insider Trading Loss

More on Raj Rajaratnam's alleged insider trading scheme: the alleged scheme produced a net loss for defendants (from NYT):

Raj Rajaratnam, the authorities say, masterminded one of the biggest insider-trading schemes in a generation.

But if Mr. Rajaratnam was trading on insider information, apparently he was not very good at it.

A close examination of the trades that led to his arrest last week reveals a startling fact: In all, Mr. Rajaratnam lost millions from what prosecutors characterize as illegal trading.

Alleged Insider Trading

You may have seen recent reports in the news of an alleged insider trading ring.  The WSJ points out that the "prominence of the alleged conspirators" is surprising:  

Why a purported billionaire would want to risk all of that for insider trades that prosecutors say yielded some $20 million in total gains is a mystery that we assume further evidence will explain.

I am interested in seeing how this case unfolds.  Based on what we know now, it seems that the potential costs of insider trading far outweighed the potential benefits to this group of individuals.  Since this appears to be a group of highly intelligent individuals, you have to wonder what would motivate them to participate in the alleged insider trading ring.